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A New Push to Rescue Xanadu Mall Project

Lenders and state officials in New Jersey are desperately trying to cobble together the second rescue of Xanadu, one of the nation’s largest, most expensive and still incomplete retail and entertainment malls.

The 2.4-million-square-foot project, which began in 2003 with futuristic visions of an indoor ski slope, a super-size Ferris wheel, a concert hall, movie theaters, bowling alleys, restaurants and expensive shops, ran through two owners and a staggering $1.9 billion before work came to a halt nearly two years ago amid the financial crisis and the collapse of Lehman Brothers.

The lenders are now hoping to strike a deal by the end of 2010 with a new developer and a new financial partner willing to put up more than $500 million to finish the five-story mall in the Meadowlands, six miles from Times Square.

“We’ve been working closely with the bank group in an effort to have a mutual accord on a new developer for the project,” said Jon F. Hanson, a top adviser to Gov. Chris Christie. “We are hopeful that, shortly, we can all agree as to who that developer will be.”

The difference this time is that the governor, who has made cost-cutting a hallmark of his administration, is willing to provide some low-interest financing and forgo sales tax revenues for a time, according to officials and executives involved in the talks. The plan is to resume work immediately so that the complex can open sometime in the second half of 2012.

But the resuscitation of the project faces daunting economic and strategic obstacles, according to retail experts and developers.

“It’s an awfully deep hole they have to dig out of,” said James Sullivan, a retailing specialist at Green Street Advisors, a real estate research firm. “It doesn’t mean it can’t be done. But which retailers will step up and be part of the solution remains to be seen.”

Already more than three years behind schedule, Xanadu has to overcome a troubled reputation, experts say.

Xanadu, which once had a million square feet of leases with a variety of retailers, including Cabela’s, the outdoor sports and clothing chain, must start over, luring tenants at a time when retailers are hesitant to spend cash on opening new shops.

The retail environment is particularly challenging. In nearby Yonkers, Forest City Ratner has leased only 35 percent of its 1.2-million-square-foot retail and entertainment complex at Ridge Hill, while another developer, O’Neil Properties Group, is marketing its recreation and retail project 30 minutes south of Manhattan in Sayreville, N.J.

Financing also remains expensive and hard to come by.

And to further complicate matters, Xanadu, which blends retailing with entertainment, must comply with regulations unheard of at most malls, like local blue laws, which prohibit retail sales on Sundays, and restrictions on mall activity imposed by their next-door neighbor, the Giants football team, on game days during the football season.

“It’s kind of a chicken-and-egg thing,” said Richard Brunelli, president of R. J. Brunelli, a retail consultant. “Until they get a credible developer known to have the financial resources to complete it, I don’t know how they’ll get tenants to pay attention. And they probably need to get it pre-leased to get the financing wrapped up.”

Proponents say that Xanadu still has undeniable strengths, including its location at the center of a vast network of highways and its proximity to high-income communities and tourist-rich Manhattan. And Mr. Hanson, a real estate investor himself, is confident that Xanadu can be completed and successful.

The New Jersey Sports and Exposition Authority picked the Mills Corporation to build the Xanadu complex in 2003 on 104 acres in the Meadowlands Sports Complex, which includes an arena, a stadium and a racetrack.

But in 2006, with Mills in financial trouble and cost overruns plaguing Xanadu, a partnership led by Colony Capital, a private equity firm based in Los Angeles, took over the project, without changing the original concept. But early in 2009, Colony and its partners ran into their own problems when a subsidiary of the bankrupt Lehman Brothers cut off the promised construction financing for Xanadu.

Early this year, Colony began talks with Stephen M. Ross, chief executive of Related Companies, to bring in fresh capital to finish the project. Mr. Ross, whose company built the $1.7 billion Time Warner Center at Columbus Circle, went trolling for tenants at a trade show in Las Vegas.

But Mr. Ross was unable to reach a final agreement, so in August the senior lenders for the project, who had invested $500 million, foreclosed, essentially wiping out the $1.4 billion put into Xanadu by Mills and Colony, Dune Capital and Kan Am.

Since then, the lenders and their advisers, Moelis & Company and Jones Lang LaSalle, have talked to a variety of possible partners, including the Triple Five group, which owns the Mall of America in Minnesota and the West Edmonton Mall in Canada, two of the largest in the world; General Growth Properties; and Vornado Realty Trust.

“We are pleased with the level of interest we have received from prospective developers, and hope to name a new developer for the project shortly,” said Michael Beckerman, a spokesman for the lenders.

The new partners would have to put up $600 million to $800 million, according to executives involved in the talks. But they would be the first to reap any potential profits, because the lenders’ $500 million would be subordinate to the new investment.

In addition, the Christie administration is likely to provide about $180 million in low-interest bonds, which would be repaid by diverting 75 percent of the projected sales tax revenues from Xanadu. Although the state’s advisers once described Xanadu as a “failed business model,” they have since softened their stance.

The Christie administration is eager to see Xanadu restarted, especially since the adjacent racetrack loses money, the Izod arena is without a tenant and the newly built stadium for the Jets and the Giants pays less in rent and fees than the old stadium.

But Mr. Brunelli, the retail adviser, said that he would surprised to see Governor Christie “put taxpayer money into this.”

“It would fly in the face of what he’s been preaching,” he added. “Nor do I believe taxpayers should put money into the project. The market should determine whether the project goes forward, not politicians.”

A version of this article appears in print on November 27, 2010, on page A16 of the New York edition with the headline: A New Push to Rescue The Xanadu Mall Project. Order Reprints|Today's Paper|Subscribe